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Preventing an Avalanche of Wind ups.

The Government has stepped in to avoid an avalanche of insolvencies as the COVID-19 assistance measures finalise in December 2020.

Interim insolvency and bankruptcy safeguards are in place until 31 December 2020 to help businesses through the pandemic. The safeguards provide:

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000) and the time companies have to respond to statutory demands they receive (21 days to 6 months);
  • A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (from $5,000 to $20,000), an increase in the time period for debtors to respond to a bankruptcy notice (21 days to 6 months), and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
  • Temporary relief for directors from any personal liability for trading while insolvent; and
  • Flexibility has been included in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

March and July 2020 saw a 46% decrease in the number of companies entering into external administration in contrast to the same time in 2019.

Concerned about increasing insolvencies in 2021, the Government introduced laws to help small business either restructure or wind up cost-effectively. The main features of the reforms:

  • A new formal debt restructuring process for companies will enable a business to keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.
  • A new, simplified liquidation pathway for small businesses will allow faster and lower-cost liquidation.

The new rules will be available to businesses with liabilities of less than $1 million.

Restructuring can be difficult for small businesses in Australia because of the significant costs associated with the legal process. These changes bring welcome relief to Australian Small Businesses in financial difficulty through no fault of their own.

The information in this article is general in nature and might not be right for your circumstance. Please arrange a meeting with one of our Accountants to discuss your particular needs.